Oklahoma Cooperative Extension Service
AGEC-1017
Water Rate Structure:
A Tool for Water
Conservation in Oklahoma1
Tracy Boyer
Associate Professor, Department of Agricultural Economics
Larry D. Sanders
Oklahoma Cooperative Extension Fact Sheets
are also available on our website at:
http://osufacts.okstate.edu
Professor, Department of Agricultural Economics
Damian C. Adams
Assistant Professor, University of Florida
Christopher N. Boyer
Assistant Professor, University of Tennessee
Michael D. Smolen
Professor Emeritus,
Department of Biosystems and Agricultural Engineering
Introduction
The price of water varies across the state by community
and category of user. Whether living in a city or a rural community, water pricing is an important component of monthly utility
costs. Not only do prices affect the household’s budget, they
also influence how to efficiently use water. The cost of water
is one factor in conservation management of an increasingly
scarce resource. Water rates (the prices the utility charges for
water) can be an effective conservation tool (see AGEC-1055
Municipal Water Conservation in Oklahoma: Background,
Issues & Options).
Conservation can help communities meet both long-term
and short-term challenges. In some parts of the state, water
infrastructure and supply are not keeping pace with population growth. From 1950 to 2014, the population of Oklahoma
grew by 77 percent (U.S. Census2). Periodic droughts and
lifestyle changes have also led to frequent shortages of water
supplies in Oklahoma. Water conservation pricing is one of
many tools that communities can use to help manage water
use. This Fact Sheet provides information on average water
rates and rate structures including conservation pricing in
Oklahoma and presents some pricing alternatives.
Water Rates: High or Low?
There’s a class example of the “paradox of value” in economics referred to as “water and diamonds.” Why is water, an
1
The authors appreciate the review comments of Dave Shideler
and Dave Engle, Oklahoma State University, and assistance
from Ben Tong, Research Assistant, Department of Agricultural
Economics, Oklahoma State University.
2 1950 Oklahoma census was 2,193,000, and 2014 census was
3,878,051.
essential ingredient to all living things, so much cheaper than
diamonds, which are a luxury and not needed to maintain life?
The short-hand answer is that water is relatively much less
scarce than diamonds, and the typical person has relatively
less use for another diamond, as compared to another glass
of water. However, as water becomes more scarce, that tradeoff begins to change, and when survival depends on that next
glass of water, its value grows by orders of magnitude. While it
is not unusual for residents to complain about taxes and utility
bills, especially when there are discussions of raising them,
the discussion below will suggest that the cost of municipal
water is relatively inexpensive for most of us. In fact, most
rates are so low, residents are probably paying mostly for the
convenience of water and nearly nothing for the water itself.
Water Rate Structures: Block Pricing
Consumer response to changing water rates varies by
community size, seasons, weather, household income and
education about water availability. Block pricing refers to charging flat rates for different segments of consumers. Residential
rates may be higher than commercial rates to encourage
economic development, for example. In communities facing
water shortages, one way to reduce water use is by charging
higher prices. A system of higher rates for higher-volume users
is called conservation pricing. Conservation pricing provides
an incentive for users to reduce non-essential water use like
outdoor irrigation, to reduce water waste and to adopt waterconserving technologies and behaviors. Such responsiveness can vary with season, weather and the range of price
changes. Evidence from Oklahoma City households (2009 to
2013) shows residential water demand was not responsive
to increases in water price, except for high consumption periods such as July and August. In the range of the unit water
prices of $2.26 to $2.55 per 1,000 gallons (3.79 m3), water
demand was relatively unchanged. Household parcel size,
income and average monthly temperature were positively
related to water demand, while rainfall, household age and
water price negatively influenced water demand (Ghimire et
al, forthcoming). Lack of rainfall had a positive effect on water
demand during the drought, perhaps for bathing/swimming
or for maintaining the lawns during the drought period.
Increasing rates for all users, however, may have unacceptable consequences. There is a particular concern for
low-income consumers whose utility bills can be a significant
Division of Agricultural Sciences and Natural Resources
•
Oklahoma State University
burden. A common solution is to use block pricing, where different volume users are charged a different rate.This approach
has been used to provide a low-cost resource to industries
needing large volumes of water. When water conservation is
the issue, block pricing maintains low cost for small-volume
users, but charges more for high-volume users.
There are a number of water rate structures possible with
block pricing, but the most common ones are inclining block
rates, declining block rates and uniform rates. A “block” is a
quantity of water for which the price per thousand gallons is
set. In most Oklahoma water systems, a block is 5,000 gallons. Each 5,000-gallon block may have a different per unit
rate. With a Declining Block Rate the price goes down as
usage goes up because the utility charges a lower price per
thousand gallons for higher-use blocks as shown in Figure 1.
The declining block rate structure provides cheaper
water to high volume users with little incentive to conserve
water. With Uniform Rates (not shown), the utility charges
the same per 1,000 gallons for all levels of water use. With
an Inclining Block Rate the price goes up with use because
the utility charges a higher price per 1,000 gallons for higheruse blocks as shown in Figure 2. Inclining rates are known to
reduce both average and peak water demand (Beecher et al.
1994).
Price per 1,000 gallons
Price of
Water
$5
$4
Oklahoma Municipal Rate Structures
Most Oklahoma communities used declining block rates
(DBR). Residential rates are per household in Table 1. In 2013,
Oklahoma had 2.55 people per household; thus, state average consumption is 65 gal./day/person, at about 21 cents/
person/day. Small community consumption is about 60 gal./
day/person, at about 23 cents/person/day. Small mid-size
community consumption is about 73 gal./day/person, at about
17 cents/person/day. Large mid-size community consumption
is about 81 gal./day/person, at about 14 cents/person/day.
Large community consumption is about 118 gal./day/person,
at about 8 cents/person/day.
While all communities are different, there are some generalizations that can be made from the information in Table
1. Average consumption increases as communities increase
in population, nearly doubling from small communities with
up to 5,000 people consuming about 154 gallons/day/household, to the largest communities with up to 100,000 people
consuming about 300 gallons/day/household. Rates generally decline for the higher volume consumers in communities
up to 50,000 people. Commercial water rates are lower than
residential rates in communities of 50,000 or less. With the
average rate less than $0.25/day/person in all communities,
marginal increases in those rates are likely to go unnoticed.
Many factors influence water prices in communities, including the age and condition of infrastructure, and water quality
and treatment requirements. In many cases, communities
may have raised rates to address new infrastructure needs
or water quality regulations.3
Why is this important?
$3
5,000
10,000
Quantity
of Water
Gallons per month
Figure 1. Example of Declining Block Rates. Many Oklahoma communities will need to address water
shortages at some point in time. Water rates can be effective
conservation tools for managing shortages in both the shortterm (e.g., from droughts) and long-term (e.g., from weather
pattern change or population growth). Inclining block rate
pricing is just one of numerous conservation rate structures
that could be used to help keep water demand equal with
available supply. See Table 2 for examples of alternative water
rate structures.
Conclusion
Price of
Water
Price per 1,000 gallons
Most municipal water systems in Oklahoma use water
rate structures that generally do not encourage conservation,
preferring declining block or uniform rates. However, some
smaller communities have moved toward an inclining block
structure rewarding conservation. Rate structures and average
rates may have a strong impact on how efficiently residents
use water, and may affect water system revenue, water consumption and other factors important for water systems.
$5
$4
$3
5,000
10,000
Gallons per month
Figure 2. Example of Inclining Block Rates.
Quantity
of Water
3 Usage and interest in conservation are related to the conditions
of the time. Most of Oklahoma was in various stages of drought
for 2011 to early 2015.
AGEC-1017-2
Table 1. Summary of Residential and Commercial Water Use and Rates, Oklahoma, 2014.
Municipalities (pop.)
up to 5,000
5,001-10,000
10,001-50,000
50,001-100,000
State Average
Avg. Mo. Consumption (Gal.)
4,608
5,553
6,202
9,000
4,875
Avg. Daily Consumption (Gal.) 153.6
185.1
206.7
300
162.5
Res. Min. Charge ($/month)
17.33
13.44
10.49
5.82
16.2
(6.6)(5.3) (2.6) (0.57)
(6.6)
5,000 Gal. Charge ($/month)
30.77
25.89
23.06
22.47
29.53
(11.3)
(6.6)(5.0)(5.6)(10.7)
10,000 Gal. Charge ($/month)
51.19
43.1
40.53
46.19
49.36
(19.8)(10.9) (10.4) (10.1)
(18.7)
50,000 Gal. Charge ($/month) 208.97
190.8
189.61
250.65
204.97
(89.1)(52.8) (52.4) (54.8)
(82.3)
200,000 Gal. Charge ($/month) 800.52
779.56
755.27
1014.89
794.48
(387.2)(186.5) (238.1) (225.1)
(353.1)
Values in Parenthesis are Standard Deviations.
Analysis of Data from: Oklahoma Municipal League, 2014.
Table 2. Summary of Alternative Conservation Rate Structures.
Rate Structure
Description.
Drought Demand
Rates are higher during drought periods.
Excess-Use
Prices are much higher for above-average water use.
Inclining Block
Price per block increases as water use increases.
Indoor/Outdoor
Prices for indoor use are lower than prices for outdoor use. This requires separate meters.
Penalties
Charges customers for exceeding allowable limits of water use.
Scarcity Pricing
Cost to develop new supplies is added to the bills of all users.
Seasonal Pricing
Water rates are higher during the season of higher demand (usually summer).
Sliding-Scale
The unit price increases, based on average consumption.
Spatial Pricing
Users pay for the actual cost of supplying water to their location. Those farther from the central water
source pay more.
Time-of-Use
Water rates are higher during peak hours or peak days of the week.
Water Budget
Block rates are defined uniquely for each customer, based on an efficient level of water use for that customer.
Source: Vickers (2001), Beecher et al. (1994), Mayer et al. (1998).
For more information
Beecher, J.A., P.C. Mann, Y. Hegazy, and J.D. Stanford. (1994).
Revenue Effect of Water Conservation and ConservationPricing: Issues and Practices. National Regulatory
Research Institute of Columbus, Ohio.
Boyer, Tracy, Kanza, Patrick, Ghimire, Monika, and
Moss,Justin. forthcoming 2015. Household Adoption of
Water Conservation and Resilience Under Drought: The
Case of Oklahoma City Water Economics and Policy.
Water Ecnomics and Policy. Elsevier.
Mayer, P.W., W.B. DeOreo, E.M. Opitz, J.C. Kiefer, W.Y. Davis,
et al. (1998). Residential End Uses of Water. Denver,
Colorado: American Water Works Association.
Oklahoma Water Resources Board [OWRB]. (2007). Oklahoma
Comprehensive Water Plan: 2007 Status Report. Oklahoma City, Oklahoma: Oklahoma Water Resources Board.
AGEC-1017-3
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